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China Beats War Drum Over Taiwan?

As I have stated before, China has no reason to be belligerent to America, or to accelerate the death of the dollar as the global reserve currency. Firstly, this is because the current world order is strengthening China, and weakening America. Second, this is because China has accumulated a huge swathe of American debt, and wants to use it to acquire American (and global) productive assets and wealth.

America on the other hand, as the declining power, has every reason to be belligerent to China.

An new book, discussed in this week’s Economics focus, by Arvind Subramanian of the Peterson Institute for International Economics argues that China’s economic might will overshadow America’s sooner than people think. Mr Subramanian combines each country’s share of world GDP, trade and foreign investment into an index of economic “dominance”. By 2030 China’s share of global economic power will match America’s in the 1970s and Britain’s a century before. Three forces will dictate China’s rise, Mr Subramanian argues: demography, convergence and “gravity”. Since China has over four times America’s population, it only has to produce a quarter of America’s output per head to exceed America’s total output. Indeed, Mr Subramanian thinks China is already the world’s biggest economy, when due account is taken of the low prices charged for many local Chinese goods and services outside its cities. China will be equally dominant in trade, accounting for twice America’s share of imports and exports. That projection relies on the “gravity” model of trade, which assumes that commerce between countries depends on their economic weight and the distance between them.

So should it come as no surprise that America continues to arm and train China’s enemies.

China’s top official newspaper warned on Friday that “madmen” on Capitol Hill who want the United States to sell advanced weapons to Taiwan were playing with fire and could pay a “disastrous price,” as the Obama administration nears a decision on a sale.

The People’s Daily, the main paper of China’s ruling Communist Party, said the United States should excise the “cancer” of the law which authorizes Washington’s sale of weapons to the self-ruled island of Taiwan that China considers its own territory.

Taiwan’s biggest ally and arms supplier, the United States is committed under a 1979 law to supply it with the weapons it needs to maintain a “sufficient self-defense capability.”

Is America making a mistake? Should they instead be looking to integrate with the rest of the world, so that the necessity of a shared future means that war, threats and belligerence are in nobody’s interest?

With the price of fiat still in free-fall in gold terms, and the DJIA:AU ratio still 1:8, I think we have quite a way to go yet. I expect it to stabilise at 1:1. So, while the crisis rumbles on, I believe high-yielding blue chips priced in fiat will still significantly under-perform gold ’til at least 2013. I will be watching the DJIA: AU ratio, and it may be worthwhile to ease into blue chips at 1:4, 1:2 and 1:1 (certainly, during the recovery after 2016 I expect that the ratio to climb back up past all these figures), but on the way down to the bottom (in my opinion this will be 2013-2015) it is going back to the 1980 support level of 1:1

Did you see the AP article about the richest 20,000 Chinese? Supposedly 27% already have a foreign passport, and something like another 47% are working on it. I’m not sure I’d buy their specific numbers, but it is still the case that many or most of the successful people in China seem to worry that the place will blow up, and have their exit route planned out. It strikes me as a bad sign that so many of the elite have that little confidence in the place.

No country is immune to tail risk. And countries with massive central planning (look at Qaddafi) are most vulnerable to it. But let’s just say that (unlike the Pentagon hopes) China doesn’t exactly have the greatest record of rising up and overthrowing tyrants. But neither did the Middle East.